The Leasing Sector in Pakistan and its Role in Capital Investment

There is some serious economic discussion here.
Pakistanis today must look at all such alternatives to improve the economic picture
there.

Ras

Ms. Shah,

I do not know about the leasing industry in Pakistan but their are some financial questions that come to mind after reading your article:

1. ``. In Pakistan, the net profit margin of the lessor ranges between 3% and 5%. The cost of lease to the lessee is 18-20%. Where is the bulk in between the two going? ``

Well the net margin is not the measure of how well the leasing companies are doing. They have to take in to consideration their costs and capital structure. My guess would be that 3-5% is the spread between the lessor`s cost of capital and the interest they charge.

2. You imply that that the interest rate is to high to justify use of the product by most industries. I would think that inflation being what it is in Pakistan, the interest rate is probably too low. A 20% gross profit margin is not that high, especially in such a high inflation environment. Multinationals are able to `afford` leasing not because they have a lower cost of capital (which they don`t, if they can arrange financing at a cheaper cost why don`t they?), it is because they run more efficient companies.

re: Saima, Faraz

Nice points Faraz. I was also not sure if the 3-5% gain to the lessor was inflation adjusted. If it is not, and assuming the inflation rate is similar to India (10%), the return would be 13-15% pa (not adjusted) and with the lease at 18% the leasing company would only make 3-5% on the deal.

If the figure is actually not inflation adjusted then I guess nobody would be leasing as the return is less than inflation. If indeed the leasing company charges 13-15%(adjusted or not), their operations are very sloppy. Could you clarify whether your figures are inflation adjusted? I was quite surprised by them. I am not too familiar with economic issues but with my limited understanding I realized that these figures are alarming. It is nice to see that chowk has posted this article on an issue of great relevance to which scant attention is paid.

Another minor question for Saima: when you say that the return in the manufacturing sector is 20% I guess it is `real` return. From what I know in money terms the manufacturing sector in India has a margin of about 30%(which come out to about 20% adjusted). Thanks.

Ashish

ps: I do not mean to cast doubt on your analysis, it is just that most subcontinental journalists mix up inflation adjusted figures with those which are not and that results in confused readers like me.

Re: Ashish

Thanks for your reply and your interest.
If I may clarify;

-None of the rates are inflation adjusted.

``Another minor question for Saima: when you say that the return in the manufacturing sector is 20% I guess it is `real` return. ``

No, I mean nominal return. I would have specified otherwise.

Re: Faraz

Thanks for your interesting questions.

``Well the net margin is not the measure of how well the leasing companies are doing. They have to take into consideration their costs and capital structure. ``

My article is not just about short-term profits but about prospects for growth. The two ideas are different in Pakistan because of exchange rate integrity. Reasons for the `wrong` /the killing exchange rate difference are aplenty. The issue has many economic development ramifications that must be addressed.

``2. You imply that that the interest rate is to high to justify use of the product by most industries. ``

To high to justify the kind of accelerated return that an inflation rate like that would mean/imply.

``I would think that inflation being what it is in Pakistan, the interest rate is probably too low. ``

Too low for what? I know that most conventional ideas revolve in equating interest rate with inflation. As a risk compensation. That is great in an economic system whereby risk is relatively easier to quantify i.e., in a system with `depth` Big number of players, diverse sectors etc. In ours, we have so much risk, so much randomness that playing around with numbers is not the answer.

``Multinationals are able to `afford` leasing not because they have a lower cost of capital (which they don`t, if they can arrange financing at a cheaper cost why don`t they?), ``

Weighted average cost of capital is lower. so they can better afford leasing. Remember they get a lot of support from the parent co. Okay efficiency begets all this, but that efficiency is not earned in Pakistan, but abroad. MNC`s transplant the foreign experience in terms of marketing, financial and manpower. Remember we are a pushover and that colonial power has a long long ripple effect. I am not complaining here, just looking at facts today and yesterday. MNC`s use leasing at very competitive rates. They don`t use alternative funds because of other reasons. You may already know that foreign companies have limits on how much capital they may invest here--because of country risk. It makes better sense to lease.

Salam
what u say about the advantages and disadvantages of leasing
plz give ur comments on it

Salam
what u say about the advantages and disadvantages of leasing
plz give ur comments on it